Investor Alert

Feb. 1, 2005, 12:01 a.m. EST

Bonds are always a buy

Commentary: Forget the Fed. What will the market bear?

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By Neil George

Editor's note: Neil George is editor of Personal Finance (pfnewsletter.com) and the daily journal By George! (bygeorge.biz) . George has positions in all of the securities recommended in this report.

McLEAN, Va. (MarketWatch) -- Alan Greenspan is meaningless to the bond market and the economy.

Sure he and his cohorts over at the Federal Reserve and its Open Market Committee keep getting lots of press -- but for what? Do you think that they decide what interest gets charged by banks -- or what yield a bond buyer gets when they trade a Treasury?

Well, how about none.

OK, well they do -- as long as some folks think that they do. The Fed only changes rates for banks to actually borrow to keep them from being in trouble with their balances at the Fed. Which if you're a bank planning to remain a bank, you'll avoid doing like the plague.

And the Fed does make some suggestions to the market for Fed Funds -- but again -- it's the market that really sets the rates.

Overall, since the bond market is a free one the last time I traded, it's the market that moves rates and yields and the Fed that pretty much just goes along for the ride. But indeed, for the past several months, the bond market has begun to edge up shorter-term yields on benchmark T-bonds making many gurus nervous about the bond market and bringing the usual "sell all bonds" call that ends up being wrong all the time.

Wrong, because all bonds don't trade the same, nor do they move in the same direction. Over the past six months the benchmark T-bonds have moved the short-end of the yield curve by nearly 1 percent, while the intermediate five-year area has been unchanged. And if you actually look at the longer end from 10-year and out, yields have actually gone down pushing prices higher and higher.

Traders in T-bonds will want to remain most short on bills and also short all the way out to just beyond four-year maturities. And at the same time, now is a great time to be long 10-year notes and bonds, which will likely remain firm giving positive carry against shorter-term maturities sold.

Beyond the trading though, plain old bond buyers also have plenty to choose from to go long for the next six months.

First up to buy are mortgages. With fixed-rate conventional conforming mortgages generally priced off of the 7- to 10-year maturities of U.S. Treasuries. Look for more stability.

And as we've been seeing for the past many months, as rates have stabilized, refinancing has slowed. In turn this brings less uncertainty and thus helps to tighten spreads over underlying T-bonds. Expect this to continue benefiting buyers of most mortgage issues both straight pass-through and structured mortgage-backed securities.

Next on the buy list are foreign governments. This doesn't mean that you need to even think about currency trading -- but rather just look at dollar denominated issues from transitioning nations from Latin America to Eastern Europe and even Asia. Yes, even in the nations affected by the tsunami tragedy.

What is happening to the benefit of the savvy bond buyers is two fold. First is that yield seekers are already up to their ears in corporate debt making the segment a bit too expensive. This in turn is driving bigger bond buyers to seek out other alternatives -- with the key focus on sovereign government bonds. Second, even nations run by leftists such as Brazil, Uruguay and elsewhere have come to understand that before any of the downtrodden get any help, they have to be able to attract and maintain sources of foreign capital. So they're continuing to improve their credibility driving yields down lower and prices of course higher.

And even beyond the reformed leftists are a few special cases such as Columbia. With billions and billions worth of direct and indirect U.S. aid, this nation fits into the category: can't fail as long as it has its rich Uncle Sam around. Yields keep plummeting, yet are still nicely attractive above benchmark U.S. issues, making them a solid buy.

Now not all of you will be able or willing to buy a bunch of the bond deals quickly outlined above. So here're the alternatives through the stock market.

For the mortgage market, there's one heck of a great mortgage lender with a solid and well-managed portfolio in Thornburg Mortgage .

For the treasury as well as the foreign bond trading strategies there are four closed-end investment companies that trade and manage their holdings the way that should be done by more. Buy all four collectively as they complement each other both during the ups and downs all through the wilds of the bond markets. The four are the Pimco Strategic Global Government /zigman2/quotes/204706272/composite RCS +0.53% , the Morgan Stanley Global Opportunity , and both the Templeton Global Income /zigman2/quotes/204737372/composite GIM +1.02% and the Emerging Markets /zigman2/quotes/208136017/composite TEI +1.00% .

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